This week is one of the most critical weeks for the stock market, dollar rate and interest markets. The policy rate decision, which will be announced after the Monetary Policy Committee meeting to be held on Thursday, June 22, will determine the fate of all markets. Initial pricing was made regarding expectations on both stocks and USD/TL exchange rates.
As can be seen in the infographic above, foreign investors have also revealed their predictions about the levels that the policy rate may reach at the first meeting. In this case, the first question that comes to mind is: Since the forecasts have been made and the pricing for the forecasts has been included in the calculations on both the stocks and dollar rates, is there anything left to affect the market on Thursday?
Just the opposite; Here we have a serious risk-opportunity duo in front of us. The same point, which is still not priced in, is highlighted in the new analysis notes from both inside and outside: What will be the new communication language of the CBRT and which expressions from the summary policy text regarding the interest rate decision will be used are as vital as the interest level to be announced. In other words, not only the eyes but also the ears of the investors will be on Thursday. Beyond what the Central Bank will decide, the markets are also interested in what to say and how. This language also creates a serious pricing potential.
Deutsche Bank: Size and language of rate hike equally important
For example, Deutsche Bank published a report in which it included the CBRT’s forecasts for the rate hike path. The bank stated that they expect interest rates to be raised to 20 percent at this week’s meeting, but that factors such as the CBRT’s language of communication are equally important as well as the size of the rate hike.
Deutsche Bank has published a report that includes the projections regarding the interest rate hike path of the Central Bank of the Republic of Turkey (CBRT). The Bank announced that the CBRT will increase the policy rate by 1150 points to 20 percent this week; He noted that they expect an additional 500 basis points increase in July due to the market reaction.
Deutsche Bank, in the June 16 report signed by Christian Wietoska, evaluated that after these rate hikes, there will be room to increase the policy rate to 30 percent for the rest of the year.
On the other hand, it was stated in the bank’s report that other possibilities were also taken into consideration. Deutsche Bank also ignored the possibility of a slightly less aggressive move to 18 percent or a much more aggressive front-loaded step to 25 percent, instead of the 20 percent rate forecast they put forward as the base scenario for this week’s meeting. stressed that it is not possible.
“Gaye Erkan’s commitment to monetary tightening will be sought in the text”
In the report, it was stated that real interest rates will continue to remain deep in the negative zone and that the CBRT will only try to catch up with TL deposit rates, and that factors other than the size of the interest rate increase will be equally important.
As an example, the Bank highlighted issues such as CBRT Chairman Hafize Gaye Erkan’s commitment to further monetary tightening if necessary and how to use the language of communication in the text to be published after the decision, and how to manage macroprudential measures.
Again, attention is drawn to a similar point with striking analyzes from the inside.
“We have to agree that an increase in interest rates is not the solution to everything”
Arcven Capital-Investment Director Assoc. Dr. While Caner Özdurak said that the communication to be made from the text of the decision is as important as the interest rate decision or increase rate to be taken, “Although the message to the markets that the decisions taken by Minister Mehmet Şimşek and his team will be followed in the interest decisions to be made, there are a few issues that need to be questioned here. First of all, we have not heard a statement by Hafize Gaye Erkan, who will announce the interest rate decision, and all communication is done through the Minister of Treasury and Finance. In other words, we are still not convinced not to question the independence of the CBRT before a decision is taken. For this reason, the communication to be made from the text of the decision is as important as the interest rate decision or the rate of increase, and even more important in my opinion. First of all, we must agree that an increase in interest rates is not the solution to everything. Any decision made without fully analyzing the dynamics between policy rates, inflation, bond rates and loan rates can lead to a much worse situation in the medium-long term, which is very sensitive and unsustainable economic dynamics.” he said.
Özdurak said in his evaluation:
“When we examine the inflation and loan interest with the models we have created by adding the 1-year bond, exchange rate, overnight interest and policy rate variables, according to the result we obtained, the inflation inertia gradually lost its effect, while the overnight interest and bond interests increased to eliminate their effects on inflation. The effect of the exchange rate, on the other hand, is still dominant, but has gradually decreased with the effect of the KKM application. This shows us that although policy rates have no effect on inflation, the risk and stress created by the artificially reduced interest rate in the markets are reflected on inflation through overnight rates and bonds. We see that loan rates are affected by inflation. The point that should be underlined here is not the interest rate policy, which is the cause of inflation, but the market mechanism that has been deteriorated due to irrational policies and has been repositioned accordingly. But loan rates are affected by high inflation. However, bond rates are the most influential factor on loan rates. For this reason, every stress in the bond market due to irrational decisions returns to the economy as a burden on credit and inflation. “
“Premature termination of CCM may cause complications”
Dr. Caner Özdurak stated that for him, how the CBRT will explain this decision and how it will communicate is much more important than the interest rate decision, and concluded his words as follows:
“Considering the Central Bank of the Republic of Turkey’s regulations on securities guarantees in loans and the losses that may occur due to bond positions after interest increases, and the effect of artificially taming foreign currency with the KKM application, from my point of view, how the CBRT will explain this decision and how it will be communicated rather than the interest rate decision. It is more important to establish. In addition, in the meeting between TÜSİAD and Mehmet Şimşek on 16 June 2023, the following part of the speech of TÜSİAD High Advisory Council (YİK) President Tuncay Özilhan is critical; “Fighting the devil of inflation and restoring confidence in the TL is our first priority. However, the way to fight inflation is not to add value to TL. Because when TL gains value, this inevitably makes imports cheaper, exports more expensive, and the external deficit rises.” From this point of view, a quick termination of the KKM application before its time may cause undesirable complications in terms of markets and economy, which are not yet convinced of the new staff.”
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